Managing India’s public resources

The media, last year, had a field day with scams—telecom spectrum allotment, Adarsh Housing society, and mining leases in Karnataka. Interestingly, much of this could have been minimized with a good policy framework. For, most of them involved the preferential and non-transparent allotment of valuable public resources, to private interests.

Unfortunately, much of the righteous indignation and outrage at these corruption scandals are being frittered away in merely bringing the corrupt to book. While undoubtedly important, this overlooks the even more fundamental issue of reforming the prevailing policy regime that governs such allotments, especially in the infrastructure sector.

This assumes greater significance given the increasingly prominent role of private sector in infrastructure. The Planning Commission has targeted a trillion dollar investment in infrastructure over the 12th Five-year Plan. At least half the investments are expected from the private sector, with public-private-partnerships (PPPs) forming a major share. In fact, the Union finance minister Pranab Mukherjee recently talked of accelerating the “PPP momentum”.

Most infrastructure investments involve some form of public resources. Private developers are given valuable lands for development of ports, airports, power projects, IT companies, industrial zones, and commercial real estate. Airwaves and airline routes are allocated to telecom operators and airlines, respectively. Electricity generators are allotted coal blocks and mining leases are executed in favour of private mining firms. The management of existing and newly created community assets such as civic utilities (water, sewerage, electricity distribution, municipal waste management etc.) are transferred through concession agreements.

A number of these transfers are done without any sort of transparent or competitive process of price discovery. Among them, PPPs, with their “anything-goes” philosophy and thin veneer of government participation, are most vulnerable to being abused for private gain. Land allotments in the guise of PPPs—and this is on the rise in all states—are an excuse for land grabs. The revenues forgone by preferential land allotments and mining leases made by all state governments would be several times the 2G spectrum scam.

In his column in Mint last year (1 December), Niranjan Rajadhyaksha had raised the issue of fairness and transparency in the allotment of natural resources. He advocated the use of independent boards, open to public scrutiny, to manage this allotment process. However, are there any independent boards? Experience with such boards even in the private sector has not been satisfactory.

The critical issue here is one of ensuring that public resources are transferred only at a fair value. In this context, the Union power ministry’s decision to restrict power purchases by state distribution utilities through a tariff-based competitive bidding (as on effect from 5 January), offers lessons for policymakers elsewhere. Hitherto, they could execute power purchase agreements with private and state-run generators through MoUs based on regulator-determined “cost-plus” tariffs. The decision is part of the National Tariff Policy in the sector and is expected to enable more efficient and transparent price discovery and reduce utilities’ power purchase burden.

It is important that resource transfers in other sectors, too, embrace similar transparent price-discovery mechanisms. It should be statutorily mandated that all public resource allotments—made by central, state and local governments—be done only after a competitive bidding process that allows governments to realize the full value of those resources. The modalities and process of resource allotments should be clearly laid out by the respective departments. They should also develop model contract documents that can be used to manage the bid process in a transparent manner. The new National Mining Policy may perhaps take a hint, and adopt some of these principles.

In recent years, even after competitive price discovery, there has been a disconcerting trend wherein successful bidders seek to renegotiate the terms of allotment. Such renegotiations often involve wholesale changes to the bid parameters, and generate moral hazard about the credibility of the tender process. It is of paramount importance that all such renegotiations be explicitly barred so as to unambiguously signal the sanctity of contracts.

Further, it is the practice that the windfall revenues from such allotments are invariably frittered away on populist and unproductive expenditures. Therefore, a policy framework that escrows these revenues (into a state or national “resource fund”) and restrains such expenditures may be appropriate. This framework may either mandate that these revenues be ploughed back into the sector or allow it to be diverted to some other predefined investments. Any deviation from this should be made only after a legislative debate and approval.

One approach to the management of these revenues, as suggested by Niranjan Rajadhyaksha, is the Alaskan Oil Fund model. Countries such as Norway, Abu Dhabi, and Saudi Arabia transfer a share of their petroleum revenues into professionally managed Sovereign Wealth Funds (SWFs), to be used for predefined purposes. The incomes from most well-managed SWFs can be utilized only after a legislative approval.

None of this will guarantee against inefficient allocation, even plunder, of public resources and its wasteful utilization. They will only increase the checks against such practices. More importantly, it will bring public resource allotments under the umbrella of a comprehensive legislation and restrain the current piecemeal and whimsical approach.